Getting the transfer balance cap’s ups and downs right is key

At the heart of the new $1.6 million pension transfer balance cap system is the Transfer Balance Account that every superannuation fund member will eventually have, unless they never commence a pension from a super fund. Understanding what increases and decreases a TBA is at the heart of advising clients.

There are two reasons super fund members will have a TBA. The first will be if they are receiving a superannuation income stream at June 30, 2017, the second will be when anyone commences a superannuation income stream after June 30, 2017.

In the explanatory memorandum detailing the new system, it is stated that the “transfer balance account operates in a similar way to a bank account or the balance of a general account ledger”. Unfortunately, this statement is not 100 per cent accurate.

A more accurate description of the way a TBA will work is that it will be similar to that of a bank statement and not a general ledger account. Credits increase the transfer balance account, while debits decrease it. Had accounting principles been applied, and this had been a bank account in a general ledger, debits would have increased the balance and credits would have decreased it.

That grizzle aside, the first credits to TBAs will occur on July 1, 2017, as a result of superannuation income streams existing at June 30, 2017 and any reversionary death benefit income streams that commenced during the 2017 year.

The other credits increasing a TBA will be superannuation income streams and reversionary income streams commenced on or after July 1, 2017, excess transfer balance earnings, and capped defined benefit income streams.

The most common debits or decreases to a TBA will be commutations. The not-quite-so-common debits include:

• structured settlement contributions
• losses due to fraud
• void transactions under the Bankruptcy Act 1966
• family law payment splits
• superannuation income streams that cease to be in retirement phase
• superannuation income streams that fail to comply with the standards
• write off of excess transfer balance where the excess cannot be reduced.

The transactions for a superannuation income stream that do not affect a TBA are the net earnings credited to a member’s account and the pension payments debited from a member’s account.

Understanding what does and does not increase or decrease a TBA is the first step in developing strategies to assist clients. The first of those strategies relates to the amount of pension payments taken each year.

Clients who will have the ability to make future non-concessional contributions but have reached their $1.6 million transfer limit should be advised to take only the minimum pension payments. If extra is needed from their superannuation fund, it should be taken as partial commutations. This will reduce the client’s TBA below the $1.6 million limit and allow them to make further non-concessional contributions.

If the client cannot make further non-concessional contributions because they are 65 or over and won’t pass the work test, the extra income needed should be taken as partial commutations from their accumulation account to preserve the amount in their pension account.

The beneficial effect of taking partial commutations from a pension account that has reached the $1.6 million limit extends to the re-contribution strategy.

Where a client wants to increase the tax-free percentage in their pension account, taking account of the new maximum non-concessional contribution limit, a partial commutation can occur in June of $300,000 in one financial year, with a non-concessional contribution of $300,000 being made in July of the following financial year.